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Convertible Note: Conversions
By Spartina, Posted 05/21/09 Add your comments
Explanations of conversion, automatic conversion and conversion discount as it applies to convertible notes.
Convertible Note Continued:
Here are questions to consider in your convertible note variables regarding:
Conversion and Automatic Conversion
Will there be a mandatory conversion at a set price? How is price determined?
Typically conversion of the note into equity takes place at the “Next Equity Event.”
Tip: Try to ensure that all Note holders have the same conversion terms and that any amendments are done on a majority of class basis, to avoid "outlier" investors from disrupting future events.
In some Notes, there is a minimum amount or threshold to be raised in a subsequent financing that will trigger the automatic conversion, for example, an equity event that is greater than $1 million being raised.
Conversion Discount:
What discount will you offer to make this attractive to investors?
Investors need incentive to make an early investment. A discount is the most common incentive to provide a prospective Note holder. The discount lowers the per share price that the investor will pay when the next financing occurs.
For example, a 20% discount would allow the Note holder to buy shares at 20% less than the new investors in the subsequent financing. If the new investors negotiate a $1/share, a Note holder would purchase the shares at $.80/share. Sometimes the discount percent increases over time.
Tip: Consider a sliding scale based on time.
Here are questions to consider in your convertible note variables regarding:
Conversion and Automatic Conversion
Will there be a mandatory conversion at a set price? How is price determined?
Typically conversion of the note into equity takes place at the “Next Equity Event.”
Tip: Try to ensure that all Note holders have the same conversion terms and that any amendments are done on a majority of class basis, to avoid "outlier" investors from disrupting future events.
In some Notes, there is a minimum amount or threshold to be raised in a subsequent financing that will trigger the automatic conversion, for example, an equity event that is greater than $1 million being raised.
Conversion Discount:
What discount will you offer to make this attractive to investors?
Investors need incentive to make an early investment. A discount is the most common incentive to provide a prospective Note holder. The discount lowers the per share price that the investor will pay when the next financing occurs.
For example, a 20% discount would allow the Note holder to buy shares at 20% less than the new investors in the subsequent financing. If the new investors negotiate a $1/share, a Note holder would purchase the shares at $.80/share. Sometimes the discount percent increases over time.
Tip: Consider a sliding scale based on time.
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